Friday, August 1, 2014

Conventional V/S FHA Financing

Conventional Financing vs FHA Financing

There are several financing options today when buying a home and it can be confusing to choose which option is best. Making the right decision is essential so that in the long run there won't be any financial constraints in paying up loans and you won't have to give up your dream home.

So today we will talk about what financing options that are available. Also the pros and cons for the home buyer to be able to determine which loan best suits their needs and eligibility.

There are 2 common types of loans offered when purchasing a property: Conventional Financing and FHA Financing.

What Is the Difference Between Conventional and FHA Financing?

Conventional loans are not guaranteed by any government agency. Typically they are offered by brokers, banks and credit unions. Buyers can obtain a conventional loan with a down-payment of less than 20% but qualifications are uncompromising. Although a conventional loan may have more rigorous credit requirements than FHA loans, if you are in a position to use one you might find that the payments are lower than FHA loans which are insured by the Federal Housing Administration. An FHA loan is guaranteed by the federal government through HUD or Housing and Urban Development Department. The federal government guarantees the lender that if the house is foreclosed on they will buy it. Since the loans are 100% covered in case of mortgage default, FHA financing offers lower down payment requirements and relatively tolerant qualification requirements. FHA loans are common among first-time home buyers and consumers with less than perfect credit history.

What are the PROs and CONs of Conventional Financing and FHA Financing?

Conventional loans are offered through private lenders without government restrictions; they may offer more room for negotiation and are more flexible. It offers many more loan program options and a higher loan than FHA.

However, in addition to higher down payments, conventional loans may have higher interest rates and require higher credit scores. You have to read contracts very carefully, since lenders can include additional clauses such as prepayment penalty clauses. Always be sure you know all the terms of your mortgage before signing any paperwork and read the fine print!

Now for FHA loans, in addition to low down payments and lenient credit requirements FHA loans offer low interest rates and no prepayment penalties. It also has lower mortgage rates and it may be easier to qualify for than a conventional loan. However, FHA loans also have disadvantages. It is subject to mortgage insurance for the life of your loan. In this case your only way out of the mortgage insurance is to refinance into a conventional loan in the future when you qualify. FHA loans also have fewer loan options than conventional loans; it is only available on owner-occupied properties and you are generally only allowed to have one FHA loan.

Who is eligible?

Conventional loans require a credit score of at least 620 most of the time; and scores under 700 may lead to either higher interest rate or additional fees. Conventional loans usually require a down-payment of between 5 and 20%, and typically allow 45% for the debt-to- income ratio. Other criteria for conventional mortgages may include a good job history, full documentation of income and assets, and price stability in the area where the home is located. Conventional loans are also available at almost every bank and lender and it can be used to finance just about any property. Meanwhile, FHA loans require a minimum down payment of 3.5%. The minimum credit score required is 500; however, only borrowers with a credit score of 580 or higher qualify for the lowest (3.5%) down-payment option and in general lenders want 640. Others are required to put 10% down.
This may vary from lender to lender though so it's best to always ask.

Now that you have an idea how Conventional financing and FHA financing works, here's a quick summary for you:

Conventional mortgages are easier to process and they allow home equity to build faster since they require higher down payments. However, you need a good credit score to qualify for a good interest rate, and some lenders require up to 20% for a down payment. These are for people who have good to excellent credit.

Lenders for FHA loans are more willing to look at the overall credit picture, rather than just the credit score alone. They require a much lower down payment and have no minimum credit score requirement. FHA loans are good for those with poor credit or for those who have less money for down payment. The mortgage insurance is high though and last for the life of the loan.

What financing option will you choose?

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